You
should have received a letter from Retirement Support Services letting
you know that the basic pension increase for the current year (starting
payment on January 2009) will be the same as the reference rate of
inflation, 2.18%. This note explains the calculation of this
increase. The note following explains how there will also be a
supplementary increase as well in January. If you have been
reading my regular reports, you know that these increases are based on
performance of the investment fund for the 5 years prior to last July 1.

Needless
to say, with the recent disastrous performance of stock markets (and
hence our investment fund), these are likely to be the last increases
we receive for some time.

The current year pension
increase calculation is based on the difference between the 5 year
average rate of return (net of investment costs) and 4.5%. The
calculation for the 2008 increase is as follows:

3.75%
is available for indexing but only 2.18% is needed to provide the
increase to cover inflation. That leaves another 1.537% for
indexing to cover shortfalls in indexing over the last three years for
those eligible for the increases. (Note that the 1.537% compounded with
the 2.18% yields 3.75%.) Although there were no shortfalls
in last year’s increase, there were shortfalls in the two years before
that of about 3½ %.

A member retiring on or before July
1, 2005 will be eligible for the 1.537% catch up, bringing the total
increase to 3.75% for such individuals. Those retiring between
July 1, 2005 and June 1, 2007 will be eligible for a partial catch
up. Retirees on or after July 1, 2007 have not had a shortfall as
there was full CPI indexing last year. And, of course, those
retiring on July 1, 2008 or later are not eligible for any pension
increase until January 1, 2010.

The exact amounts of the supplements for various retirement dates are shown in the table below.

Notes: * this is the increase that could be awarded if excess returns were sufficiently large

** this is the amount of excess returns available for indexing

January 2008 Pension Increase for the Salaried Pension Plan

Contributed by Les Robb

MURA representative on the Pension Trust Committee

Your Current Year Increase

You
should have received a letter from Retirement Support Services letting
you know that the pension increase for the current year (starting
payment on January 2008) will be 1.72%. This note explains the
calculation of this increase. The note following explains how there
will also be a supplementary increase as well in January

The
current year pension increase calculation is based on the difference
between the 5 year average rate of return (net of investment costs) and
4.5%. The calculation for the 2007 increase is as follows:

Calculation of Five Year Average (for 01/01/08 increase) %

2007 Rate of Return (ending June 30, 2007 ) 14.45

2006 Rate of Return (ending June 30, 2006 ) 5.93

2005 Rate of Return (ending June 30, 2005 ) 10.00

2004 Rate of Return (ending June 30, 2004 ) 14.84

2003 Rate of Return (ending June 30, 2003 ) (2.57)

Total Return for Last Five Years 42.65

Five Year Annual Average Return (Total Return / 5) = 8.53%

(A) Rate of Return in Excess of 4.5% (4.69% - 4.5%) = 4.03%

(B) Average Consumer Price Index to June 30, 2006 = 1.72%

Increase to Pensions (the lesser of A and B) = 1.72%

As
I anticipated in a recent article in the Fall 2007 MURA News there is
excess return that is not needed to provide the current year increase -
in particular the difference between 4.03% and 1.72%. This difference
amounts to 2.271% (not the simple arithmetic difference between 4.03
and 1.72 which would be 2.31%). The reason it is not the simple
arithmetic difference is because of compound interest. The 1.72% is
applied first and then the 2.271% is applied to this new level of
pension and this leads to an overall increase of 4.03% (1.0172 *
1.02271 = 1.0403).

Your Supplementary Increase

So,
there is an additional 2.271% available to be applied against past
losses. Who gets this increase? Well, it depends on how much you were
'shortchanged' in recent years.

Let me start with a
table that shows the increases that can be expected on January 1 for
those who retired on July 1 (the so-called "normal" retirement date in
our Plan). .

Retirement Date

Increase for the current year

Supplementary

Increase

July 1, 2004 *

1.72%

2.271%

July 1, 2005

1.72%

1.596%

July 1, 2006

1.72%

0.000%

* applies to all dates before July 1, 2004 also.

This
table shows that those who retired on July 1, 2004 or earlier will
receive the full 2.271% that is available. Those retiring the following
July 1 will get a smaller 'catch up' because this is all they would
have been eligible for had they received full indexing in the past.
Those who retired on July 1, 2006 will get no supplementary increase as
they are not deemed to have missed out on any indexing to which they
were entitled. And, of course, those retiring on July 1, 2007 or later
are not eligible for any increase until January 1, 2009 .

What
about those who retired on dates other than July 1? Well, pension rules
only allow one to 'catch up' for what was deemed to be lost, so someone
retiring on, say, Jan 1 of a year is eligible for half of the increase
for the year in question that was received by those retiring the
previous July 1. To be more exact, those retiring before March 2005 are
deemed to have lost at least 2.271% over the past three years (the time
frame we look at for this calculation) and are thus eligible for the
full 2.271% supplementary increase. Those retiring between that date
and July 1, 2006 will receive a 'catch up' that reflects how much they
are deemed to have lost. This catch up declines to 1.596% by July 1,
2005 and by 1/12 th of 1.596 (or 0.133%) each month that retirement was
delayed after that date.

In the following
article you will find a more complete table of the exact percentages
that can be expected for each retirement date and a more complete
explanation of the increase calculation.

Detailed Explanation of Supplementary Increase

Les Robb

In
the January issue of the MURA News and in the article immediately above
I reported on the increases to pensions in pay this year. In this
article I go into a bit more detail for those who are interested in
exactly how this all works and for those who can't get enough of
compound interest.

Let me start with a recap of
changes in CPI, changes to our pensions (increases received) over the
past 3 years (and the current year) and the indexing shortfall. Three
years is the period for which individuals can receive 'catch up' if
there has been an indexing shortfall (as has been the case for the last
3 years).

Period Ending

CPI for 12 months

Increase received for 12 months - effective the following Jan 1

Indexing shortfall for the period

June 30, 2004

1.73%

0.00%

1.730%

June 30, 2005

2.08%

0.19%

1.886%

June 30, 2006

2.50%

0.89%

1.596%

June 30, 2007

1.72%

1.72%

0.000%

First,
the second and third columns in the above table are the data we start
with for the supplementary calculation. The fourth column ('shortfall')
is the difference between columns 2 and 3 - though it is the geometric
difference rather than simply the subtraction of column 3 from column 2
because of compound interest. The explanation of this whole 'catch up'
issue requires repeated applications of 'compound interest' so I will
elaborate a bit on it here. Consider the second row of the table above.
We received .19% as our increase. If we get another increase of 1.886%
on top of this, we would then have received a 2.08% increase which is
what is needed to restore the purchasing power of our pensions for that
year (1.0019 X 1.01886 = 1.0208, for those of you checking the
calculation).

Now, looking at the last row of the
table above, we can see that everyone so entitled will receive full
indexing this January. Eligible individuals are those who started
retirement on or before July 1, 2006 . Note that each row of the table
applies to those who retired a year before the 'ending period' so that
the first row of the table applies to individuals who retired on or
before July 1, 2003 , the second row to individuals retiring on or
before July1, 2004, etc.

Next, looking at the
second last row of the table, those individuals who started retirement
on or before July 1, 2005 lost out on 1.596% indexing to which they
were entitled for that year (if returns had permitted), those retiring
on July 1, 2004 lost out on both the 1.596% last year and 1.886% the
previous year and those retiring on July 1, 2003, or any date before
that) lost in all three years (1.596% , 1.886% and 1.730%). The total
shortfall for those retiring at various dates involves compounding the
losses and is shown in the cumulative indexing shortfall of the
following table which shows the supplementary increases for 'normal'
(ie. July 1) retirements.

Retirement Date

CPI for 12 months

Ending the

Next June 30

Increase for 12 months corresponding to the period at left

Indexing shortfall for the period

Cumulative Indexing shortfall

Supplementary

Increase

On or before July 1, 2003

1.73%

0.00%

1.730%

5.303%

2.271%

July 1,

2004

2.08%

0.19%

1.886%

3.512%

2.271%

July 1,

2005

2.50%

0.89%

1.596%

1.596%

1.596%

July 1,

2006

1.72%

1.72%

0.000%

0.000%

0.00%

The
cumulative loss of 5.303% is calculated by applying sequentially
1.730%, 1.886% and 1.596% (1.0173*1.01886*1.01596 = 1.05303). Similar
calculations apply to the other cumulative losses/shortfalls.

Now,
the actual supplementary increase is calculated as the minimum of the
cumulative loss and the amount available for the supplementary increase
(2.271%). The result is shown in the last column.

So,
that covers retirees with a July 1 retirement date. What about
individuals who retired at a date other than July 1? Individuals
retiring at a date other than July 1 are treated differently in their initial year of indexing ( this
is true for 'current year indexing' as well as for any 'catch up'). So,
for example, somebody who retired between July 1, 2003 and July 1, 2004
would have been eligible for only partial indexing
of the 1.73% CPI increase that would have been applied (had the fund
earned sufficient interest). This is a regulatory requirement and not
just something in the McMaster Plan. Individuals are only eligible to
catch up what is deemed to have been lost and if you are only retired
for part of the year you are deemed to have lost only part of the
indexing (in spite of the fact that our salaries only have a general
increase once a year). Someone retiring half way through the year, for
example, would have been eligible for half the indexing for that year,
or .865%. They would then, of course, be eligible for the full 1.886%
catch up the next year, and so on.

Below I provide
a table (taken from the Human Resources presentation at the Pension
Trust Committee) that shows what should be expected for each retirement
date from July 1, 2003 to June 1, 2006 .

Notes from the report to the MURA AGM, May 30, 2007
by Les Robb

(Also published in MURAnews, June 2007)

I am your representative on the Pension Trust Committee of the Salaried
Pension Plan at McMaster. I thought today I would spend a few minutes
on the nature of that Committee.

This
Committee has prime responsibility for overseeing the Pension Plan and,
in particular, the investments of the Plan. The Committee has 16
members, of which 8 are representatives of various Plan member groups:
Faculty and Librarians (3), CAW (2), TMG (1), CFA (1), and Retirees
(1). The Finance Committee of the Board appoints 4 members and there
are 4 ex-officio members (the Board Chair & Vice Chair, the
President and the VP Administration).

Although the
Committee only makes recommendations to the Finance Committee and
thence to the Board of Governors, in many instances changes can only be
made on the basis of recommendations from the Pension Trust Committee.
In short, representatives of Plan members can, and do, have
considerable say in the operation of our plan. If the investments of
the Plan do poorly part of the responsibility is that of the Plan
member representatives.

The returns of the McMaster
Plan have been weak for the last few years and, as you are all aware,
our indexing has fallen short of keeping pace with the cost of living.
The poor indexing result is partly due to a formula that has a five
year memory so that the negative returns of 2002 and 2003 have
continued to hurt us. The other fact that has not helped us is that our
fund performance is only average compared to the other university
pension plans in Canada. Had we performed in the top quarter of
Canadian University Pension funds over the last five years our indexing
would have been better.

Some years ago the
Committee made the decision to invest more than average (for Canadian
pension plans) in international markets. In the last few years this
allocation has hurt our performance (relative to those funds more
heavily invested in Canadian equities). However, the Committee
continues to believe that this diversification is a good decision for
the long run. We on the Pension Trust Committee are working hard
to do better in the future, both absolutely and relatively, and to that
end we have made changes to some of our investment managers and
invested in new ways in recent years. We have replaced one
underperforming manager and reallocated international funds that were
previously index funds (because of previous legal requirements) to
active investment managers. I am optimistic that we will perform better
relative to our peers in the future.

So,
now to the question you have been waiting for: what does indexing for
next January look like at this juncture? I am quite confident that we
will get full indexing for the current year next January. A massive
market collapse before the end of June could, of course, prove me
wrong. By the time you read this you will probably know whether that
has happened. Last spring I thought we were going to do quite well too,
but a falling market in May and June meant we ended up with less than
full indexing last January. However, I am more confident this time
around. In the first nine months of our year (since July 1, last) our
funds have earned about 13 and one-half percent (net) and I calculate
that we need only about a 5% return in the current year to achieve full
indexing (if inflation continues to run around 2%). So, I’m looking
forward to good news in the fall.

Les Robb's report, January 2007

(originally published in MURAnews).

By
now you should have received a letter from Retirement Support Services
letting you know that the pension increase for January 2007 is 0.89%.
This article explains the calculation of this increase.

The
pension increase calculation is based on the difference between the 5
year average rate of return (net of investment costs) and 4.5%. Based
on this, the calculation for the 2007 increase is as follows:

As I have explained in the past, the calculation includes two half year
periods for 2001/02 because there was a change in the reporting period
in 2002 (from January to July). With everything taken into account the
5 year average comes out at only 5.39%, 0.89% above the 4.5% benchmark
which must be earned before indexing begins. A year ago I was looking
forward to an increase more in line with inflation, but the investment
experience for the 12 months ending June 30, 2006 turned out to be much
lower than expected. The second quarter of 2006 was particularly
disappointing. So we’re left with a 0.89 % pension increase for 2007.
Next year’s outlook is better. The calculation will drop the two six
month periods from 2001/02; we will then have only a single negative
carry forward from the past. If the rate of return next year is as good
as this year, 5.93%, our pensions could increase by as much as 2.3%
(remember, the increase is limited by inflation). Even a zero rate of
return next year would give us a bigger increase than this year. With
the two recent return rates of 10% and almost 15%, the five-year
averaging will begin to help raise the 5 year rate, just as in the
reverse way the negative returns from 4 and 5 years ago have hurt us in
the last few years. If there are no major surprises in the investment
market, the prospect of a better pension increase next year is positive.